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U.S. central bank keeps rate steady at 0.25% but warns COVID-19 impact far from over

The Federal Reserve kept its benchmark interest rate steady in a range of between zero and 0.25 per cent on Wednesday, but warned the U.S. economy still faces “considerable risk” from COVID-19.

The U.S. central bank said it will keep buying bonds to maintain low borrowing rates and support the U.S. economy in the midst of a recession. And it said nearly all the Fed’s policy-makers foresee no rate hike through 2022.

The Fed has cut its benchmark short-term rate to near zero. Keeping its rate ultra-low for more than two more years could make it easier for consumers and businesses to borrow and spend enough to sustain an economy depressed by business shutdowns and high unemployment.

The central bank noted in a statement after its policy meeting ended Wednesday that the viral outbreak has caused a sharp fall in economic activity and a surge in job losses.

Fed officials estimate that the economy will shrink 6.5 per cent this year, in line with other forecasts, before expanding five per cent in 2021. It foresees sees the unemployment rate at 9.3 per cent, near the peak of the last recession, by the end of this year. The rate now is 13.3 per cent.

Powell will explain move at 2:30 p.m.

At a virtual news conference Wednesday afternoon, Fed chairman Jerome Powell is expected to drive home the message that the economy remains in need of extraordinary help despite recent glimmers of a possible recovery including a government report Friday that employers surprisingly added jobs in May.

Since March, the Fed has slashed its benchmark short-term rate, bought $2.1 trillion US in Treasury and mortgage bonds to inject cash into markets, and rolled out nine lending programs to try to keep credit flowing smoothly. Most analysts expect the Fed to pause and assess the economic landscape before embarking on any further actions, which could come at September’s meeting.

The Fed’s actions are credited with having helped fuel an extraordinary rally in the stock market, which has nearly regained its pre-pandemic high after a dizzying plunge in March.

And by committing to buy corporate bonds, thereby reinvigorating the market for such securities, the Fed has also ensured that corporations can continue to borrow. Its initiatives also include a first-ever program through which the Fed is buying state and local government debt to support the municipal bond market.

Many economists say those steps have prevented the downturn from worsening, by keeping credit flowing. This week, the National Bureau of Economic Research, the official arbiter of recessions, declared that the U.S. economy entered a recession in February.

One challenge for the Fed now is to shift its focus from the emergency actions it took in March and April to try to carry the economy through a shutdown, to what steps it will take to stimulate a recovery as businesses increasingly reopen.

In remarks last month, Fed vice-chair Richard Clarida stressed that the viral outbreak remains a menace to the economy. But he also indicated that Fed officials want to see a few more months of data to gauge the economy’s health before determining their next steps

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